What's my first step?

Question

Recently my friend's grandmother passed away and the family is going to sell her house. Obviously my opportunity sensor bells started ringing; however, I've never done a deal yet, so i don't even know where to begin. Should i approach the executor first, or should I get pre-approved for a loan? I know I'd have more leverage if i was able to be a cash buyer, but I only have enough saved right now for a down payment. I know that I'd save on commission and realtor fees if I get this deal before it is listed with an agent, so I have to act fast.

I've been inside the house a few months ago and it seemed like everything was fine, may need some updating, but at that time I wasn't there looking to buy the house. From what I could find on Zillow's "recently sold" listings, a comparable property just down the street that had been updated sold for $400k in December.

If you were in my situation, what would be your first course of action?

Or maybe I'm foolish for wanting to buy my friend's family's house?

Wes Blackwell · Answer

@Greg Leach

First thing I would do is talk with your friend and get a sense of what the family's plans are for the property. Mainly you need to know whether they plan to keep it or sell it. If they plan on selling it then you may have an opportunity here.

If you plan to buy the property, fix it up, and re-sell it immediately, you should tell them. They might not like the idea of you making money off their dead grandma. Selling to a family friend is one thing, but that friend selling to some complete stranger right after and making a bunch of money is another. If you hold for a few years before selling that's completely different.

If that's your plan, you need to speak with a loan officer ASAP so you can determine what you qualify for. Since you're still in school, I'm guessing you might not have the work history or income requirements needed for a loan, but perhaps someone in your family might be willing to co-sign for you if you can meet the monthly mortgage payment. If it's $300k with 5% down you're probably looking at roughly $2,000 per month.

Partnering on a deal with the current owner to fix up the property and sell it seems complicated and risky for you. Here's a mock-scenario to explain:

Let's say I'm your friend and now I own grandma's property free and clear. It could use some TLC and updating, but nothing too major. Maybe $30k or so. The property is currently worth $300k but will be worth $400k after the updates.

So, for $30k invested we'll have an extra $100k in value, for a +$70k net! Awesome!

Since I could've just sold the property as-is for $300k, there's no reason to split any of that profit with you since. So I'll just split the $70k with you 50-50.

If the cost for rehab is split 50-50, you'll spend $15k to make $35k. Not bad at all. But since you won't own the property during the rehab you're taking a huge risk. What if after it's all fixed up they decide to keep it? How are you supposed to get your investment back?

I know, it's your friend... but money changes people. And your friend might not be the ultimate decision maker. Perhaps your friend's Uncle Carl is, and he decides they should keep it in the family and now he wants to live in it. Uh-oh.

But perhaps instead you could partner with someone else here on the site or another investor you know who has the expertise and money to make the deal happen. Just be careful who you trust and make sure you read everything you sign. Twice.

After you speak with the owner and talk with a loan officer, come back and tag us to give some more details and we can help you try and put this deal together. Best of luck!

Franco Li · Answer

So as an investor you'd actually want some leverage. All-cash is actually not a good idea, since you won't be making as much per dollar that you invested. If I were you, I would see if I can afford a 15-20% down payment with surplus (lenders require liquidity), then crunch the numbers and understand the necessary expenses to make sure this place is cashflowing. Also how much of a discount would you be purchasing this property at? First course of action is understand the investment potential and understand your own financials - knowledge is key! Good luck.

Guy Olds · Answer

@Greg Leach You use whatever percentage works in your local market. For example a house with an ARV of 200k with 20k in repairs would be (if you used 70%) $140,000 - $20,000 = $120,000 offer.

Only a distressed seller or a seller with a distressed house would accept such a low offer.

But if all the local rehabbers are using 75% your offers will be 5% to low and you'll never buy a house. You need to know what % works in your local market.

Wes Blackwell · Answer

@Greg Leach

If you have the purchasing power to acquire the property by yourself I wouldn't worry about a partner for now, you can always figure that part out later. Beyond funds for a rehab, there isn't much they'd be able to contribute if you can afford the property by yourself. And you can always borrow those funds from somebody else.

For the rehab, it's really not as hard as you think, and you might even be able to do most of the work yourself. Home Depot sells a DIY book called Home Improvement 1-2-3 that walks you through every basic home repair and upgrade you can think of. Combine that with some YouTube videos and there won't be much you can't accomplish by yourself (depending on your level of skill for swinging a hammer).

You can pretty much count on new flooring, fresh coat of paint inside and out, new lighting, and remodeled / updated kitchens and bathrooms. That's where you're going to get the most bang for your buck.

Then you simply go down the list and replace and update what you need depending on the current condition and state of disrepair. Some of this work you will need a contractor for:

• Roof
• Exterior Siding
• Sliding Glass Windows
• Dual Pane Windows
• Garage Door
• Landscaping
• HVAC
• Water Heater
• Plumbing / Electrical
• Decks / Patios
• Concrete Work
• Sheet Rock / Drywall Replacement

As far as the maximum purchase price goes, that's really going to depend on your exit strategy. If you're looking to turn this thing around and sell it in 6 months or less you're going to need more of a discount. If you're planning on holding it for a few years to live in you could buy it for full price and still make money on it.

As an added step I would perhaps read Bigger Pocket's two books on rehabs and estimating costs. That will help you get your numbers for the the rehab and you'll need to calculate that into your expenses, along with the costs to sell (typically 7-8% of the selling price).

If the ARV is $400k, getting a 30% discount on a home that is owned outright is going to be a real difficult sell to the homeowner. That's a discount of $120k, and there's no distress or motivation to sell it for such a discount (like there would be if there was a mortgage payment coming every month they could not afford).

So the purchase price is really going to depend on what they want to get out of it and what they think it's worth. I would start the conversation with "What are you guys looking / expecting to get out of it?" as if they were just going to outright sell it.

The seller might currently think it's worth way more than it is and that could throw your numbers all off since they won't be willing to discount to the price you need to make the numbers work.

If you message me the address, I can tell you what it's currently worth and the potential ARV within 10%. Then you'll at least know what you're dealing with.

Greg Leach · Answer

thanks everyone for the input! I'm talking with my friend now. I'll meet with a loan officer before I meet with the executors. I had my other friend who works as an escrow processor run some info on the property and it looks like the home is 100% owned in the family trust, no loan or lean holder. But they do plan on selling the home.

They've moved a lot out of the house already, but are still working on it, so @Mindy Jensen allowing them to leave stuff may still give an incentive.

@Guy Olds @Mark Pedroza since this is in the family trust, I assume it would work differently than a probate property correct?

@Wes Blackwell your comment rang extremely true to me, I'd love to partner with someone more knowledgeable than myself, especially considering I believe I would be able to purchase said property, but then rehab is another thing. The problem is, I am so new I don't know where/who to turn to, or who to trust. Never been to a REIA or anything, but would love to.

Anyway, I'll get to working on this and report back.

oh, just curious, even if the buyer/home isn't in a "distressed" situation, we're still supposed to use the 70% rule right? Guy Olds, you sorta mentioned something about that.

Guy Olds · Answer

@Greg Leach  @Mark Pedroza  As for Mark's comment that probate purchase agreement will be required, that is not true, I believe. Only realtors are supposed to use the CAR (California Association of Realtors) purchase agreement. And since you want to buy the property without a realtor you are not required to use their purchase agreement. You can use any purchase contract you want. Just make sure it does what you need it to do.

If a realtor lists a probate property they will require that an offer comes in on the 9 page CAR contract and the multi-page probate addendum. If a probate property is being sold under Limited Authority and thus needs court confirmation any offer must be on the CAR contract plus the probate addendum because there is a realtor involved.

If you are buying a probate property or a property that doesn't need to be probated you can use any contract you choose if a realtor is not involved.

Greg, you just need to make sure that at some point you are talking to the family member who has the legal right to sell the house if that's what the family wants to do. Oh and you should know that most probate houses that get sold get sold through realtors because they aren't distressed situations.

Greg Leach · Answer

@Mindy Jensen that's great advice! I know they have lots of stuff in the house, so allowing them to leave stuff may solve one of their problems, and as many of the wholesalers say, we aren't buying houses, we're solving problems!

@Pat McGrath the house was left to the family trust, and I've thought about approaching them with the idea of partnering and I find the improvement on the property. I just wanted to run it by everyone in the forum and see what they thought was best.

Thanks everyone for the support and guidance, the comments so far have all been extremely helpful!

Pat McGrath · Answer

Would they consider partnering with you to improve the property & resell? Id approach my friend that way first. Are you sure its probate or could it be a trust? As mindy pointed out, you also need to understand what your finances are, what you can borrow using a mlo or even a hard money loan or bring some friends into a joint venture. all have their own risks/rewards of course so it comes down to your risk tolerance.  Mindy gives good advice...

Mark Pedroza · Answer

@Greg Leach

You can start verifying to see if a probate case has opened on your friends grandmother.

Here's the Sacramento county website:

https://services.saccourt.ca.gov/PublicCaseAccess/...

This is accessible 24/7. An account is required to view probate documents. This is were your first course of action would be. Your going to need a last name as well. As for saving on commission and realtor fee's a probate purchase agreement is going to be required (CA law). You could write your own contract but that would have to be an "addendum" attached to the purchase agreement. So, this is were a real estate agent can help.

Good luck...

Jay Dewberry · Answer

Firstly, Greg, welcome to BP. Secondly, it’s not foolish at all in wanting to help a friend if their family is interested in selling the grandmother’s home. Many times the family wants to keep property in the family for legacy/future generations. But many times, they want NOTHING to do with it. They think to themselves just give me what you feel it’s worth and let’s move on. So if you can offer to make it as less of a headache as possible, that may work out…for both parties.

Let me ask you some questions: What would you like to happen if you bought the property? Live in it? Sell it in the future? Sell it immediately? Rent it out? These questions would be important to answer to yourself before approaching the family with an offer. Perhaps, partnering up with a seasoned investor/mentor and offering a percentage of the deal would help. Lastly, there are many probate investing topics, podcasts, videos, and blogs right here on BP. Reading through many will help to familiarize yourself with the pros and cons.

Nevertheless, be as fragile as possible with the family. Make your offer a win-win for both you and the family. Good luck.

What's my first step?

Most Popular Reply